Public pensions under pressure

There is a growing trend to make public sector pension plans operate like those in the private sector, driven by the need to cut tax burdens and boost labour mobility, according to a study published by the Organisation for Economic Co-operation and Development study published yesterday.

Governments around the world are starting part or fully-funded arrangements for civil servants' pensions, which are among the world's biggest when measured by assets, the Paris-based OECD said.

Tax-funded pension schemes, typically paying benefits linked to the salary earned in a year before retirement, are under pressure around the world partly due to greying populations and this is a thorny political problem for governments in Europe, the United States and Asia.

The OECD report said there is a trend to harmonise public and private sector pensions, introducing the idea of partly or entirely funding public sector plans in advance rather than relying on pay-as-you-go inflows from the taxpayer.

Public retirement plans should be run and regulated as independent organisations, able to take members from different employers, while schemes should also embrace the defined contribution (DC) funding model to cut costs of large liabilities, the report said.

DC schemes pay a benefit based on market returns in contrast to defined benefit (DB) plans, which typically link benefits to length of service and salary. Public sector pensions have traditionally used the DB method.

Pension funds of public-sector workers are among the world's largest. In 2003, seven out of the top 10 worldwide largest pension funds by assets were run for civil servants.

The report laid out a number of problems in public-sector pensions. It said they faced higher risks of investment mismanagement because these funds are often pressured to put money into government projects rather than aiming to deliver highest possible returns.

In some countries, pension investments are politically-driven while some portfolios are tightly regulated on what sort of assets they can hold, such as equities. - (Reuters)